Procuring a cash infusion for your small or medium sized business is a task most business owners must contend with at one point or another. Business owners need to introduce new cash into their businesses for a number of reasons, such as to improve working capital, to purchase raw materials, to expand into new territories or markets, or to purchase or lease equipment or gear.
Even though most businesses need to obtain capital from time to time, there can be a stigma associated with seeking money for your business whether it is in the form of a business loan or an advance. This is particularly true for businesses that are seeking alternative forms of financing such as accounts receivables financing, short-term loans and merchant cash advance services.
3 Most Common Misconceptions About Factoring Receivables
Factoring Receivables Is Only for Businesses That Are in Dire Straits
Some businesses that don’t meet the strict requirements for a loan do turn to options such as invoice factoring as a way to get capital for their business instead. But let’s look closer at these loan requirements and qualifications. Most businesses today – as much as 80 percent according to some reports – don’t meet the loan requirements.
In other words, the vast majority of small- and medium-sized businesses aren’t able to qualify for a business loan from the bank. As a result, many of them turn to other funding options such as invoice factoring. This is a far cry from what many people think, which is that invoice factoring is a last resort financing option for companies about to go under.
Accounts Receivables Financing Costs Too Much Money
Another common misconception about invoice factoring has to do with how much it costs. Just like any other business or financial service, the cost of invoice factoring varies by company to company. Some firms charge flat rates per client while others have up-front fees and processing fees. Some require a minimum volume while others do not. Most invoice factoring companies will, however, charge less for high volume transactions though this varies.
So there’s really no way to say as a generalization that factoring receivables is expensive, particularly when you consider the options. Firms run the gamut as to what they charge from as low as 0.02% to as high as 0.29%. Factoring companies do charge differently than bank loans, which usually charge a flat interest rate. This is part of the reason factoring might be viewed as more expensive. The cost of accounts receivable financing in part has to do with how long it takes for your client to remit payment. The sooner they submit their invoice payment, the less you owe to the factoring company.
Does Factoring Cost Too Much? You Decide
For the sake of easy math, let’s give an example of how factoring rates are calculated. Let’s say your business submits an invoice for $50,000 for factoring and the company charges a rate of 5% per month or per 30-days. If your client remits payment on time, your fees to the factoring company are $2500. Are there other fees? Again, this varies by factoring institution but it is a good idea to ask about all fees in advance. Is $2500 too much to pay for your money? That’s a question only you can answer.
Factoring can sometimes be more expensive than a business loan but if you need money fast, you have to be willing to pay a little extra for it. Accounts receivable financing is a lot less expensive than other alternative finance options, such as merchant cash advances.
The Factoring Company Will Take Control of the Business
The third misunderstood notion is that the factoring institution will somehow take over your business. In other words, some people think that once you partner with an invoice factoring company, you’ll no longer have access to your financials or that you’ll have to go through them to get to your money. This one is completely untrue as partnering with a factoring company is a far cry from handing them the keys to your business.
A factoring company is more like a facilitator of capital; they enable you to access cash that would otherwise be tied up in your receivables. They also manage this exchange or processing of receivables where money often goes into an account set up for this purpose. Usually, the business has access to monitor this account so they can know precisely when deposits have been made.
So no, the invoice factoring company doesn’t control your finances once your partner with them. They do, however, facilitate the invoicing and receivables process. Each company works a little differently so it is a good idea to learn about these policies and procedures in advance.
While accounts receivable financing differs from traditional lending in many ways, factoring isn’t only for businesses in trouble, isn’t necessarily too expensive and doesn’t involve a loss of control over your business. It is a commercial finance option for any business with credit-worthy clients in need of capital